Fix mining tax or lose $1b for jobs, Gillard told

The Gillard government is facing another $1 billion budget shortfall and an embarrassing parliamentary defeat, with the Greens and the Coalition set to block cuts to research and development funding.

A day after ending the Greens' formal alliance with Labor, leader Christine Milne declared that unless the government ''fixed'' the huge revenue holes in the mining tax she would not support the ''ill-conceived'' axing of research and development tax breaks for big companies - a $1 billion savings measure that was supposed to pay for the ''game-changing'' jobs package announced by the Prime Minister, Julia Gillard, last Sunday.

Senator Milne is demanding Labor fix both the mining tax loophole, requiring it to effectively pay for rises in state government royalties, and the ''design flaw'' that allows big miners generous writeoffs against their mining tax liabilities.

Ms Gillard has insisted the design of the mining tax will not change, even though it raised just $126 million in its first six months, well short of the forecast $2 billion in first year revenue.

Senator Milne said the decision to block the R&D cuts showed ''the difference between having an agreement with Labor and not having one''.

''Before we would have tried to help them sort this mess out, now they're on their own and I'm not going to support this ill-conceived policy , , , it's complete madness to be undermining Australia's research and development culture.''

Fairfax Media revealed on Wednesday that the Industry Department warned the government last year the $1 billion in savings from the plan might never eventuate, as firms could rearrange their affairs to bring their Australian turnover under the $2 billion cutoff.

After being refused a briefing about the policy the Coalition industry spokeswoman, Sophie Mirabella, said the Coalition was also very likely to oppose it.

''It is very difficult and probably irresponsible to support something that lacks credibility, has been canned by industry and was not supported by the Industry Department,'' she said.

Senator Milne said she had worked hard on last year's changes to research and development allowances, and believed Australia should be increasing R&D spending, not cutting it.

''If we fix the mining tax, we could have R&D spending and more jobs, and that is why we will not consider any changes to the R&D arrangements until the government is prepared to plug the holes in the mining tax,'' she said, pledging to support spending measures in the job package.

Only $400 million of the $1 billion in forecast savings was spent on the job package, with $600 million kept for priorities in the May 14 budget.

The Industry Minister, Greg Combet, said he was confident the government had considered and ''overcome'' the risks in his department's warnings. ''This is cabinet-in-confidence material which is typically provided to ministers when considering options about these things,'' he said.

''We considered how to deal with the risks that are identified . . . But we're confident that we can safely implement the policy. Treasury does these costings.''

Senator Milne said the government had promised industry not to make more changes to R&D allowances after the last round.